- The retail asset class is expected to be resilient from a re-pricing perspective
- Online shopping levels have declined and are expected to stabilise
- Private investors active, with offshore investment to also pick up
The Australian retail market is expected to perform well across 2023, with last year’s momentum and new capital sources expected to continue fuelling the market.
A lack of stock was also a factor, JLL’s Head of Retail Investments – Australia Sam Hatcher said: “Given the limited availability of on-market opportunities, a key driver of activity is the stock overhang of AUD $6.6 billion of retail assets that was withdrawn in 2022, as a mismatch between vendor and buyer expectations existed.”
AREITS to go quiet
JLL recently released its mid-year Retail Investment Outlook Report with one of the predictions including a change of capital sources.
The report noted that private investors are currently active as buyers and sellers, but given funding challenges, AREITs are likely to remain inactive through the year in terms of acquisitions and will likely be net sellers.
Increased investment activity is likely to come from offshore investors, with the value proposition relative to market fundamentals in Australia attractive.
Offshore groups, which have re-focussed on convenience retail and sub-regional centres in recent years, will potentially start to target regional centres given the correction in values to-date, recovery in trading performance and leasing, and depth of alternate use opportunities which are likely to emerge.
JLL’s Senior Director, Retail Investments – Australia Nick Willis said: “Institutional offshore capital sources, namely sovereign wealth funds and pension funds are likely to shift away from pooled wholesale funds into mandate funds for more direct control over liquidity, still preferring to use domestic managers to oversee the investment and asset management.
“Similarly, Australian superannuation funds are also shifting their investment structure to have more direct exposure.
“Evidence of this was the recent 50% stake in Sunshine Marketplace in Victoria sold for AUD $66 million to Aware Real Estate, with Altis Property Partners acting as their manager, marking Aware Real Estate’s first direct acquisition of a retail centre. The move follows other acquisitions made by Australian superannuation funds such as Cbus and UniSuper.
“We anticipate investment through mandates to accelerate as a growing trend,” Willis said.
Resilience expected as the year progresses
JLL expects retail to be the most resilient asset class from a re-pricing perspective, given the reset in income and values in 2020 compared to other sectors that maintained high asset valuations during this period.
Asset re-pricing remains a key theme in 2023 as the yield decompression cycle continues across sectors.
Hatcher said, “From a valuation and pricing perspective, the retail sector continues to be increasingly attractive in comparison to other property sectors. This resulted in significant new sources of capital entering the sector in 2022.”
More evidence of retail yield decompression is likely to emerge in 2023 but not to the same extent as some other real estate sectors given retail yields were at a higher starting point relative to the risk-free rate, and the lack of significant compression over recent years in most retail sub-sectors.
Inflation hangs over the market
Investment returns and profit are likely to take a hit as inflation leads to reduced discretionary spending, higher operating costs, and higher labour costs.
“Increasing cost pressures for business will continue to weigh on retailer profitability in the near term and will consequently slow leasing demand and dampen rental increases,” said JLL’s Head of Retail, Property and Asset Management – Australia, Tony Doherty.
He also noted a shift back to bricks and mortar, with online shopping seeing reduced spending.
“We expect e-commerce rates to stabilise over the short to medium term, serving as a potential tailwind for brick-and-mortar stores and retail vacancy.”
Inflation will also have an impact on investor decisions. JLL’s Head of Capital Markets Research – Australia, Andrew Quillfeldt noted:
“While rising debt costs are a concern for highly leveraged investors, for the majority of institutional real estate owners in Australia, debt management has remained relatively conservative in terms of gearing and interest cover ratios post the GFC.
“However, some fund managers may choose to selectively divest assets to maintain a conservative position ahead of potential further devaluations in 2023.”
